Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

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Friday, April 26, 2013

Krugman's 1 Percent Fallacy

I know all readers are shocked, SHOCKED that Paul Krugman still is going off on the Reinhart-Rogoff paper, but today he ups the ante. Anyone who believes that setting off yet another unsustainable boom is not good policy actually is a people-hating moralist who sides with the Evil 1 Percent.

In other words, folks, it's Goldstein (or maybe "Scoldstein") time again. Yes, everyone knows that the way to "fix" the economy is for the government to borrow vast sums of money for consumption goods, and the spending that comes with that and printing money will give the economy enough "traction" to move on itself -- at least until the next boom runs out of steam and government has to repeat the process.

Krugman goes on to explain that anyone who might question this economic "wisdom" does so out of malevolence and (maybe) some ignorance or a false belief in some sort of economic "morality," writing:

...austerity maintained and even strengthened its grip on elite opinion. Why?

Part of the answer surely lies in the widespread desire to see economics as a morality play, to make it a tale of excess and its consequences. We lived beyond our means, the story goes, and now we’re paying the inevitable price. Economists can explain ad nauseam that this is wrong, that the reason we have mass unemployment isn’t that we spent too much in the past but that we’re spending too little now, and that this problem can and should be solved. No matter; many people have a visceral sense that we sinned and must seek redemption through suffering — and neither economic argument nor the observation that the people now suffering aren’t at all the same people who sinned during the bubble years makes much of a dent.

However, we find that this brand of economic fundamentalism really is nothing more than a dastardly plot hatched by the Evil 1 Percent (or maybe just the Evil One himself, namely Scoldstein):

What, after all, do people want from economic policy? The answer, it turns out, is that it depends on which people you ask — a point documented in a recent research paper by the political scientists Benjamin Page, Larry Bartels and Jason Seawright. The paper compares the policy preferences of ordinary Americans with those of the very wealthy, and the results are eye-opening.

Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media, but the wealthy, by a large majority, regard deficits as the most important problem we face. And how should the budget deficit be brought down? The wealthy favor cutting federal spending on health care and Social Security — that is, “entitlements” — while the public at large actually wants to see spending on those programs rise.

You get the idea: The austerity agenda looks a lot like a simple expression of upper-class preferences, wrapped in a facade of academic rigor. What the top 1 percent wants becomes what economic science says we must do.

Could Krugman be engaging in...conspiracy theories? Read on:

Does a continuing depression actually serve the interests of the wealthy? That’s doubtful, since a booming economy is generally good for almost everyone. What is true, however, is that the years since we turned to austerity have been dismal for workers but not at all bad for the wealthy, who have benefited from surging profits and stock prices even as long-term unemployment festers. The 1 percent may not actually want a weak economy, but they’re doing well enough to indulge their prejudices.

And this makes one wonder how much difference the intellectual collapse of the austerian position will actually make. To the extent that we have policy of the 1 percent, by the 1 percent, for the 1 percent, won’t we just see new justifications for the same old policies?

This is a most interesting position he is taking. There are two sets of policies in which government policy directly enriches that "1 percent." The first involves the massive bank and financial bailouts that have been at the heart of the "austerity" policies imposed upon countries like Greece, Ireland, Portugal, and Spain, not to mention the continuing bailouts being pushed by the central banks of Europe, the USA, and Japan.

And guess what? Krugman supports the bailouts, even though he believes that they should be financed, at least in Europe, via booms, the very kind of booms that collapsed and created the financial crises in the first place. To put it mildly, Krugman demands another round of "hair of the dog" economics.

The second enrichment-of-the-wealthy policy is crony capitalism, but when David Stockman speaks out against this get-rich-by-being-politically-connected set of schemes, Krugman lambasts him for being a "scold." So, it seems that The Great One wants it both ways: cry crocodile tears about how government policies hurt the poor, and then endorse economic schemes that...hurt the poor.

What about the so-called morality play of which Krugman speaks? He is saying that Austrians believe that somehow booms are "sinful," and that if Wall Street and the rest of the economy get drunk, then it is time to hide the alcohol and everything else. No soup for you!!

Yet, what is it that Austrians have been saying? We hold that credit-fed booms, and especially the credit-fed booms that involve heavy borrowing for purchasing consumption goods, are going to run aground because they are not sustainable. The borrowing and investment patterns do not match consumer spending and saving preferences, which means that the boom runs out of steam on its own.

If the economy is to have a real recovery, then entrepreneurs must be able to find those assets that are potentially profitable and be able to move resources from lower-valued uses to higher-valued uses. But, the Krugman plan is to have government subsidize moving resources from higher-valued uses to lower-valued uses, and keep doing it until one day things magically turn around.

The housing boom crashed when it became apparent that most Americans could not afford the super-high prices created by the boom and when a wave of mortgage defaults hit the system, it went down. Krugman, apparently not appreciating the hard fact that a family making $50K a year probably cannot afford the payments on a house selling for $500K, says that trying to keep an asset bubble alive not only is economically feasible, but also the only moral policy that can be implemented.

Austrians are not calling for "austerity" for austerity's sake or because they want people to be thrown out of work, but rather because they believe the current sets of policies are not economically sustainable. The American economy cannot subsidize itself into prosperity via "green energy," nor can the economy continue to exist as a series of asset bubbles. Furthermore, while the Fed can mask the problems by purchasing financial instruments like mortgage securities in order to prop up their prices, it cannot repeal the Law of Demand or the Law of Scarcity.

And Austrians certainly are not "austerians" of the European variety. We simply are saying we don't believe in the Debt Fairy or the Inflation Fairy, and we don't need Scoldstein to convince us that we cannot rebuild an economy by having Ben Bernanke pull financial rabbits from his hat.

Krugman, on the other hand, fervently believes that even though debt piled up during the last boom, which finally ran aground, the way to create a stronger economy -- and somehow magically pay down some of the debt, at least in the future -- is for more of the same. So, who is practicing a religious fundamentalism?

13 comments:

The problem with Krugman's thought process is that it is SO easy to succumb to the dark side. How awesome would it be to NEVER have a down turn again? How great would it be to NEVER have to experience a bubble? Because when the bubble burst everyone is caught?

As far as Zealotry. We all ascribe to beliefs, many of them fallacious. It is just we cannot see the fallacy ergo we can defend our positions. Do I think that fiscal stimulus CAN be a tool, sure. Do I think deficit spending is a tool that the Government HAS to have? Sure. Do I think that the way the Fed and the Government are colluding together right now is the proper course of action.

No.

In the end economic growth can only come form the creation of goods and services that people want and use. Durable goods being in my own mind the best thing that you can create. In Krugman's world why is there even a need to go and work? What possible benefit can be derived from producing something of value?

Lastly it does make me laugh when people suggest that all of this is done by the evil 1%, which is the most volatile economic group around. Such an easy club to fall in and out of. No the truth is that Krugman's very ideals ensures that those at the bottom lose purchasing power, where as the benefits at the top due to a lag in wage growth while CPI ( which I still think is a fallacious number in many respects but hey it is what we have ) takes money from them in droves..

Anyway yes Krugman is a fool, but how can you help a man who can only see the mote in others eyes? ( did you like how I brought religion in at the end?)

In addition to the Debt Fairy and the Inflation Fairy, I would add another make-believe creature to Krugman's pantheon of fairies: the Capital Investment Fairy. The genius of the Capital Investment Fairy is that prior capital losses due to bad planning or bad political decisions can be instantly redeemed by creating fresh capital with a few keystrokes.

"Has the U.S. been practicing "austerity" during the last 10 years? Has Professor Krugman ever mentioned the name of any economist who advocates "austerity"?"

Well, you have to remember that Krugman's version of "austerity" is defined as decreases in increases. To him, the morbidly obese man man who orders a diet coke instead of a regular coke to go along with his hourly meal of deep fat fried butter sticks is on the verge of starvation.

The biggest whopper is that the 1% is lobbying for FEDGOV spending cuts. There's a reason almost half of the 1% live in the counties surrounding Rome on the Potomac. The borrowing and spending binge has been very profitable for them.

And there is the tiny fact the Krugman himself is a card carrying member of the 1%. Funny he didn't mention that.

In a way, Krugman is just doing his job -- if you understand that his job is to be the C.S. Lewis of the redneck left. (That is, a seemingly-rational apologist for non-rational beliefs.)

In fact, Krugman's apologetics are of the same strained variety you would expect from a creationist attempting to explain the fossil record, or a flat-earther attempting to explain the curvature of the earth.

As I think I mentioned a year back, or more. Krugman is back to building a failure narrative. Government policy has failed, the economy is continuing to sour and scapegoats are the order of the day because personal responsibility is unacceptable.

Blaming something amorphous and undefined called "austerity" might be sufficient to fool a few people.

If you can put the name "Reinhart-Rogoff" alongside that, with a few academic sounding keywords, might fool a few more.

"Thus, the average American is somewhat worried about budget deficits, which is no surprise given the constant barrage of deficit scare stories in the news media."

Somehow I've missed those deficit scare stories. In fact, if it wasn't for the media I'd also be pretty much unaware of all this unemployment stuff, too. There was mucho traffico everywhere today, in fairly new-looking vehicles, didn't look like much like a depression to me. I did see a fat guy holding a cardboard sign at a street corner asking for help in dealing with his diabetes, though.

By the way, those houses that were sold to folks that eventually couldn't make the payments when the property went "underwater"; every one of the previous owners of those properties received payment in full for them. What happened to that money? Is there a society of "sold at the top of the market" people meeting monthly in Naples, Florida?

The conspiracy theory comment brings to mind this page's attack on Krugman (obviously him despite his name not being used), trying to explain why despite his nobel his views can be off base.

The page is dealing with the issue of crony capitalism causing the healthcare mess and addresses the issue of the public being duped by “economists” peddling nonsense on healthcare, including Krugman.

http://www.politicsdebunked.com/article-list/healthcare“It can be difficult for the public to assess who to trust if they don’t know much about economics and business since even a subset of those with credentials like Nobel Prizes can sometimes be off target when they are writing on topics outside their niche. The Skeptics Dictionary says “The Nobel disease has been defined as ‘an affliction of certain Nobel Prize recipients which causes them to embrace strange or scientifically unsound ideas, usually later in life.’”. Some of them are creative and have many ideas, and a fraction of those ideas matched reality and led to a major contribution to their field. Those creative ideas may however only sometimes turn out to match reality and at other times lead them astray in other niches even within their general field. A trade economist may or may not do well writing about other areas of economics, and may or may not be biased towards pushing for favors for special interest groups he likes.

It is useful for the public to learn to be skeptical whether an “expert” may be pushing a favor for a special interest niche, or be pushing outdated concepts for emotional reasons like that “competition is always wasteful”. A nobel laureate economist recently suggested that some nobel prize winners are idiots.. a comment some suspect was driven by the fact that many view him that way for comments outside his niche. Some Nobel laureates have generalist mindsets (many won prizes for broad contributions to the field) and can apply their intellectual ability productively to many niches, while others are specialists whose recognized contributions are limited to a fairly narrow niche and they have trouble “seeing the forest for the trees” when confronting big picture issues. “

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About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).